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Fibonacci Retracement: Learn how to use Fibonacci Retracement in trading

Understanding what are Fibonacci Retracement levels

Fibonacci Retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers (Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on.. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci Retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used.

The indicator is useful because it can be drawn between any two significant price points, such as a high and a low. The indicator will then create the levels between those two points.

Suppose the price of a stock rises $10 and then drops $2.36. In that case, it has retraced 23.6%, which is a Fibonacci number. Fibonacci numbers are found throughout nature. Therefore, many traders believe that these numbers also have relevance in financial markets.

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How to trade with Fibonacci Retracement

One of the best ways to use the Fibonacci Retracement tool is to spot potential support and resistance levels and see if they line up with Fibonacci Retracement levels.

If Fibonacci levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher.

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As you can see from the above chart, it’s been on an uptrend recently. Look at all those green candles! Then you might decide that you want to get in on this long BTC/USDT trend. But the question is, “When do you enter?” You bust out the Fibonacci Retracement tool, mark the Swing Low and Swing High. Now your chart looks pretty sweet with all those Fibonacci Retracement levels.

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Now that we have a framework to increase our probability of finding a solid entry, we can answer the question “Where should you enter?” You look back a little bit and you see that the 9185.37  price was good resistance level in the past and it just happens to line up with the 50.0% Fibonacci Retracement level. Now that it’s broken, it could turn into support and be a good place to buy.

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If you did set an order somewhere around the 50.0% Fib level, you’d be a pretty happy trader! Price tried to pierce through the support level but failed to close below it. Eventually, the pair broke past the Swing High and resumed its uptrend. You can do the same setup on a downtrend as well. The point is you should look for price levels that seem to have been areas of interest in the past.

Key Takeaways

  • Fibonacci Retracement levels connect any two points that the trader views as relevant, typically a high point and a low point.
  • The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
  • The percentage levels provided are areas where the price could stall or reverse.
  • The countertrend moves tend to fall into certain parameters, which are often the Fibonacci Retracement levels.
  • These levels should not be relied on exclusively, it is dangerous to assume the price will reverse after hitting a specific Fibonacci level.
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